Where Is the Microsoft Board?

by James Heskett

Summing Up

The predominance of opinions expressed a concern about what happened in Microsoft's dispute with the Government and laid the blame at the feet of both the company's leadership and of board members who either supported the leadership or, if they didn't, were not able to make their views heard.

But a significant number supported Bill Gates and the board and weren't even sure that, when the final result is known, it will be a net minus for the company. They generally took issue with one or more premises including: (1) that the outcome of the dispute would be a negative one for Microsoft caused by (2) a defense personally led by Bill Gates and (3) by the failure of the company's board to provide counsel.

In the case of a high-tech company where significant ownership rests in the hands of management (e.g Microsoft), the Boards have a major dilemma: are they supposed to protect the interests of shareholders alone or, those of all stakeholders, including employees and customers?
Moris Simson (HBS ISMP 91)
Mitel Corporation

Those taking issue with these premises generally saw the company's leadership with the support of the board consciously standing on principle, whether defending the right to innovate or standing up against the Government's regulatory bias. There was some feeling in this group that Microsoft was unlucky in drawing a judge who turned out to be hostile to their cause. Matt Deter's remarks typify this position. As he put it, "Antitrust law is a set of laws the government uses to enforce their whims and desires...For Microsoft to treat such a system of non-objective law with disdain ... and contempt ... is a commendable and uplifting act of principle."

Questioning whether outside board members provide all that much added objectivity and influence and pointing to the success of the company, Bruce Lowenthal said "...I would rather address the problem of board inaction when things are not going well even with a high percentage of outside representation."

The views of those essentially lamenting the result but questioning the board's ability to do much about it were summed up in Erich Almasy's comment that what happened "is more a function of Bill Gates' dominant personality than the Board's immaturity. When I look at GE's Board I see ... a kind of Super Board. Yet, I wonder how often they confront, much less contradict, Jack Welch." As Tom Broge put it, "If someone can figure out how to get people to listen to good advice when they don't want to hear it, now THAT would be something big."

Moris Simson's thought-provoking response was typical of those that raised more questions than they answered. In his words, "As long as shareholder value maximization is the sole focus of Boards in a capitalistic context, objectivity in judgment is at risk: putting shareholders above all stakeholders is not a sustainable proposition, especially in the Knowledge Economy where employees are the most valuable asset." It was one of several that questioned whether governance policies and practices are designed to achieve what many felt to be their primary purpose, to foster the long-term success of the corporation on behalf of all stakeholders. What do you think?

Original Article

Governance in start-ups is different than in established large organizations. More often, a director is an investor, friend, expert, and resource. Involvement of a director is more intense, often resulting in daily or at least weekly contact with management at all levels. Insiders are the rule. Committees for audit or compensation are either non-existent or academic. And the founder and largest shareholder is very active in governance matters.

Then the public offering occurs. Regulation or law requires changes in behavior. Outside members of the board take on greater significance. Committees are required. The board now has undivided responsibility to shareholders other than the founding group of investors. And audit and governance, whether or not the founder is still on board, become higher-priority issues. At least in theory.

In the case of a high-tech company where significant ownership rests in the hands of management (e.g Microsoft), the Boards have a major dilemma: are they supposed to protect the interests of shareholders alone or, those of all stakeholders, including employees and customers?
Moris Simson (HBS ISMP 91)Mitel Corporation

However, theory doesn't seem to have held up well among a number of the recent high-tech firms that have issued stock to the public. Insiders still rule. A minimum of required committee work is done. And investors seem not to have been too concerned about governance, given the meteoric performance of many newly-issued stocks.

To whom should maturing high-tech start-ups be able to look for guidance regarding matters of governance? One place might be their counterparts that have successfully achieved post-adolescent industry leadership, companies like Microsoft. But what kind of model has Microsoft provided in the way of governance?

In many ways, its board still looks a lot like that of a start-up. Of the typically seven members in recent years, only two could be regarded as outsiders. Last year, two of the outsiders failed to meet board or committee attendance guidelines generally thought appropriate for public companies. One of them resigned because of other demands on her time.

Now comes the government's anti-trust suit against Microsoft, a suit that we are told was decided on both its merit as well as the behavior of Microsoft's management, its lack of contrition, and its disdainful attitude toward government bureaucrats.

The merit of the case is what it is. But what could the Microsoft board have done to counsel management about the company's conduct of the case? Would management, particularly the company's founder, have listened? Does the board at least have the responsibility to try to provide such counsel? Assuming that the founder might have been most willing to listen to a board member who was CEO of another company, would it have helped to have more than one such person (the most Microsoft had during this period) on its board? What can newer high tech-start-ups do to avoid the board situation that Microsoft has found itself in?

Comments

Erich Almasy, (HBS MBA '75)

Vice President, Mercer Management Consulting

While I heartily agree that Microsoft's Board lacks the heart and stomach to effectively challenge management (mis)direction, I wonder if this is more a function of Bill Gates' dominant personality than the Board's immaturity. When I look at GE's Board I see a diverse, independent, and vigorous group of Directors-a kind of a Super Board. Yet, I wonder how often they confront, much less contradict, Jack Welch.

Tom Broge (HBS MBA '80)

President, New Venture Associates

I am afraid that I think your premise, though popular, is entirely wrong as to the makeup of Microsoft's Board, and that the mistaken premise puts the wrong spin on the questions raised here.

Once public, you say "The board now has undivided responsibility to shareholders other than the founding group of investors." What?! Public or not, directors represent shareholders as a group, not SOME shareholders. Their fiduciary duty is to the value of all of those shares, so they must avoid allowing their judgment to be overly protective of small ownership positions just as they must guard against "special deals" for large ownership blocks that are not in the best interest of the whole.

A founding "investor" (as opposed to a founding manager) seems to me to be a perfect outside director. His interest is in the value of the enterprise, and his ego is not involved in changes that the quest to increase that value may require. Furthermore, smaller shareholders know that the longer term welfare of the company has the keen attention of someone with a suitably large holding, particularly since a large shareholder can't get out of a stock as fast as someone with relatively few shares.

So Microsoft is "fine"—better than MANY established firms with huge (rubber stamp?) boards—in having 4 outside directors and 3 management people. Two of the "management" directors really are "shareholder directors", i.e.—more akin to outside directors than inside because of the massive value of their holdings (making their employment role rather meaningless to them financially). And ironically, making my point perfectly, the one token "small shareholder" outside director was useless and finally quit! What real motivation did she have to stay?

No, I think this perspective changes the nature of the problem here. Perhaps Microsoft should have 2 (now 3) more large investor non-management directors, but that probably would not have changed the shortcoming that you outlined. Gates may well have listened less in a more threatening environment of 8 other directors instead of only 6. And if one of them was there simply because he was CEO of another, hopefully substantial, company, Gates might have crawled deeper into his hole.

True, it is possible that another director with a suitably activist personality might have gotten Gates to take a broader view of Microsoft's situation. But that would involve the happenstance of personality, not a structural improvement such as the kind for which you are searching. Unfortunately, I believe we see the hard-headedness of a founder in this case, not something representative of a grander problem. Not that "founder hard-headedness" is not a BIG problem for newly emerging companies. It may be one of the biggest problems that they face.

Of course the Board has a duty to attempt to provide counsel. In the case of Microsoft, I find it nearly unimaginable that one or more of the directors didn't do just that. Remember, this company has been magnificently successful. Such success did NOT come from the exclusive efforts of one man, nor, most probably, without very effective interaction from the Board. So, with these practical assumptions, I suggest that the Microsoft Board is a fine model, and that the founder just couldn't get himself to listen to good advice. Too bad. If someone can figure out how to get people to listen to good advice when they don't want to hear it, now THAT would be something big!

Jim Ullyot (HBS MBA '66)

President, Creative Communications, Inc.

In addition to insider boards, one should suspect the failure of legal counsel (whether inside or outside) to take a stronger stance in advising any company on the strategy for responding to a government inquiry/law suit—as well as "preventive maintenance" beforehand. I am reminded of a friend who is an expert on "crisis management", publishing a newsletter on a regular basis. He's out there with case studies and examples of how companies have been blind-sided or surprised by various crises and what has worked best (or what he recommends to work best) in such situations, in effect preparing his clients for what may come—and perhaps more importantly, how to avoid some of the more avoidable catastrophes.

My experience suggests that CEOs and Boards understandably look to legal counsel when legal problems come up, and legal counsel is rarely ahead of the game by preparing or advising companies with "early warning" scenarios. (That may also be because they are not called upon until after problems arise.) The lawyers are all too often reactive, called upon too late, and somehow expected to represent the entire company with their response/action. In addition to outside CEOs, perhaps Boards should also call upon legal counsel more often to try to anticipate, prepare for—and avoid—the worst situations—as well as to be advised on how to react and behave when the worst comes.

Name withheld at writer's request

It is tempting to think that more outside directors could have ameliorated the behavior of Microsoft. I can't buy it, though, as the culture of a company, for good or bad, is set by the CEO or founder. When they are the same person, that culture is even more the responsibility of the CEO. And Microsoft has long had a "whatever it takes to win" culture. Gates may not be any technical genius, but he is the premier marketing genius of our time, possessing the brilliance to conceive ploys that gain MS market share, and the ruthlessness to do anything to crush the opposition.

If that ruthlessness and disregard for the most elemental rules of fair competition [leads to] making money hand over fist, it is hard to see how directors would have changed anything.

Bruce Lowenthal

This is a major problem. There are several competing considerations:

1. Where major shareholder ARE the officers (e.g. MSFT, ORCL), how much should their input dominate? This is problem because personal power can be more important to these folks than economic benefit to the shareholders, in general, as seems to be the situation with MSFT and the [Department of Justice].

2. How can boards be designed to fairly represent the shareholders? How are different blocks identified? (e.g. short term profit vs. long term viability blocks).

3. How can boards better control the actions of such companies as ORCL, SUNW and MSFT? Is this even reasonable? The power of these three companies is in large part derived from the fact that they are ruled by "one person". If ruled by a committee (board or not) it could be easily be argued that the result would weaken the company.

4. One of the issues with taking a company public is that the founders "want [to have] their cake and eat it too". That is to say, the want the money from the IPO but still want to run the company with little interference from the board. However, there are other reasons to go public. In the case of MSFT it is much stronger because of the financial benefits of stock options to MSFT. MSFT might not be nearly as competitive if it was private because it could not issue stock options. In the case of MSFT, we get little oversight by the board but MSFT gets to issue stock options. Perhaps that is best.

5. The real problem is not companies like MSFT which are doing pretty well but those which have not done well for a number of years but where the board takes no action. In a priority sense I would consider that a more important problem to address.

6. Personally, I think that MSFT's shareholder would be better served if MSFT quickly ended the litigation via either splitting up MSFT or agreeing "in good faith" to change their behavior. That is to say, continued litigation is worse that either of these outcomes.

6. Suppose that is true. If the board forced Gates to find a way to end the litigation quickly would MSFT shareholders be better served or would the loss of power by Gates hurt more? (point 3).

7. Your point might be that it doesn't matter, it is just better policy to have more outside representation on the board so they can be a better watchdog. Perhaps, but I would rather address the problem of board inaction when things are not going well even with a high percentage of outside representation.

Name withheld at writer's request

The intro and question posed - "Where is the Microsoft Board?" - appears to prejudge the final outcome of the government bureaucrats' charges and implies these could be avoided by having independent board members to protect consumers, company shareholders and industry competitors.

The Politicians, Brokerage Houses, Regulators, and the Media have had difficulty understanding the majority of new, maturing and experienced high tech start-ups. Perhaps Mr. Gates and his Insider Board Members and Professional Advisors are better qualified than those, Analysts, Regulators, Reporters and Lawyers in the Justice Department.

Time will tell long after the legal actions.

Charles Heskett (HBS MBA '93)

CEO, President, Benefits Interactive

Let see: 2 high school buddies that "own" the company; another "insider"; A friend of Bill Sr. that would have a hard time continuing to live in Seattle (boards include PACCAR, WAMU, Seattle Times, Safeco) if he crossed Bill G.; another outsider that never led an organization as CEO or even President; and a longtime member of the board from August Capital that saw his substantial holdings in stock greatly reduced recently. We know about the other mentioned Board member that "left to pursue other matters." She needed to plan her golden parachute windfall after managing to erode most of the value in the company she was leading. I'm not sure that this dinner table is set for maximum discussion or intense debate over anything.

With all of the accounting scandals, earnings warnings, insider selling etc. going on in the markets, I think it high time that fund managers and individual investors take a much more "informed" look at the board makeup prior to buying in. I don't think many do, and when the winds change, there is nobody at the helm except the guy/gal that steered you into the storm in the first place.

It takes fighters like the Microsoft team to build such an amazing and successful organization. What they need are some other personalities at the table whose views and input are just as valued as [those of] the fighters. Had they had those earlier, the story MAY have been quite different.

Matt Deter

Software Engineer

Antitrust Law is a set of laws the government uses to enforce their whims and desires on individuals and the companies they create. This is accomplished by writing the law in such a way as to insure guilt, no matter what action is taken.

If you are a successful company with significant market share (which means that you produce something lots of people value — supposedly a good thing) then the following rules apply:

1) If price is too low, company is DUMPING the product to kill competition (never mind the equivocation between killing a competitor and killing competition).

2) If the price is too high, company is guilty of GOUGING. (Never mind the equivocation between price and value, and its relation to demand. A gallon of water after an earthquake really *is* worth $5).

3) If, to avoid 1 and 2, company sets price to be equal to that of others, company is guilty of PRICE FIXING.

For Microsoft to treat such a system of non-objective law with disdain, contrition, and contempt and to do so consistently is a commendable and uplifting act of principle.

Forget management and advisors and governance. Consider that Bill Gates actually understands 1, 2, and 3, and has decided to act on principle. Deliberately, and with full knowledge of the issues at stake.

I wish him the best of luck.

Michael V. Jennings (HBS MBA '68)

President, Financial Analytics Corporation

It is absolutely the Board's responsibility and obligation to provide an independent, more objective and longer term perspective to a company's founder.

In the case of Microsoft, Mr. Gates, with the encouragement of his legal team, decided that personal vindication, based upon his own standards of right and wrong behavior, was more important then doing the right thing for his company and society. Adding more senior CEOs to the board or seeking the counsel of CEOs (both active and retired) who had during their tenure been through antitrust investigations (e.g. IBM and AT&T) would also have been a good idea.

While it is hopefully not too late for Warren's good friend Bill to wake up, the outcome so far is pretty sad.

HBS Alum (MBA '94)

Name withheld at writer's request

I'm not ready to blame Microsoft's board or management. I believe that the Microsoft board advised Microsoft management to pursue the track they took, and that they were right in doing so.

To your specific points:

"Now comes the government's anti-trust suit against Microsoft, a suit that we are told was decided on both its merit as well as the behavior of Microsoft's management, its lack of contrition, and its disdainful attitude toward government bureaucrats."

If this case was decided for any of these three reasons, then the judge should be removed from office and disbarred. That's not justice; that's a miscarriage of justice.

"The merit of the case is what it is."

The merit of the case is very weak. It is a case argued on behalf of Microsoft competitors, not American consumers. Microsoft is guilty of being an aggressive competitor. The proposed solution is clearly not in consumers' best interest as it will stagnate innovation in the industry and fragment a standard. The proposed solution hurts American industry and sets a horrible precedent for innovative American companies.

"But what could the Microsoft board have done to counsel management about the company's conduct of the case?"

Microsoft made two tactical mistakes. Gates should have testified in person, and Allchin should have looked at the videotape first. I'm not sure whether governance or immaturity is to blame, but these are both minor issues. The board and management team are sticking up for the right to innovate.

Bob Maher

Manager, MMS

I think your observations about Micosoft's lack of external perspective are apt.

There is a word for this sort of thing: Incest. Typically incest means short-term efficiency, but at the cost of long-term calamity.

Lyndon S. Cox

General Engineer, NCBA

Microsoft should have handled the issue of its monopolistic practices differently. They would have if they had either more CEOs or more outsiders on the board. As long as the board was only seven members, and most were Microsoft veterans, they would think that what they did was right. However, I am an outsider along with most of America, and I think differently. The problem with Microsoft is that they all think alike.

The trouble is that the notions of Executive Management, Supervisory Oversightand Advisory Resource are all blurred in the U.S. model of corporate governance. Some Boards have members fulfilling all three roles above, while some have members doing barely one of them (i.e. supervisory).

In the case of a high-tech company where significant ownership rests in the handsof management (e.g Microsoft), the Boards have a major dilemma: are they supposed to protect the interests of shareholders alone or, those of all stakeholders, including employees and customers?

As long as shareholder value maximization is the sole focus of Boards in a capitalistic context, objectivity in judgment is at risk: putting shareholders above all stakeholders is not a sustainable proposition, especially in the Knowledge Economy where employees are the most valuable asset.

Daniel Bond

Consultant, Rose International

Governance requires "eyes and ears" that are scanning the environment in addition to looking inward. Otherwise, metaphorically speaking, a company runs headlong with its head down. Is it surprising when it bashes its head trying to avoid stubbing it's toe?